Analysis of Simkin v. Blank

The front page of the New York Times (May 31, 2011) contains a great story by Peter Lattman, quoting me, on the pending case of Simkin v. Blank.   The question is whether a divorce agreement based on the assumed existence of an invstment account with Bernie Madoff’s firm can be rescinded due to mutual mistake. 

A few of the many comments on Mr. Lattman’s article disagree with my quote in the article that the case is strong for mutual mistake.  Absent space in the New York Times to explain, following is an elaboration of this position.  It is one of the 45 stories about recent contracts disputes in my forthcoming book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press 2012).

Among investors stung by Madoff’s scam were Steven Simkin, a prominent New York real estate attorney with the firm of Paul, Weiss, Rifkind, Wharton & Garrison, and Laura Blank, a distinguished lawyer working for the City University of New York and  heiress to the fortune of the neckwear manufacturing company, J.S. Blank. After 30 years of marriage and raising two children, Steven and Laura separated in 2004, not long after Laura’s mother had died. To finalize their divorce, on June 27, 2006, Steven, who lived in Scarsdale, and Laura, who lived in Manhattan, signed an agreement dividing their property.

            In their negotiations, the couple listed their marital assets, including four cars, the Scarsdale and Manhattan homes, and millions in bank, securities and retirement funds, including their investments with Madoff. The homes and cars aside, it appeared that the couple’s total assets amounted to $13.2 million. The agreement provided that Steven would keep most assets in exchange for paying Laura $6.6 million in cash. Thirty months later, when Madoff’s Ponzi scheme was exposed, they discovered that the value of the investments was overstated by $5.4 million because of it.

            After Madoff confessed, Steven wanted to rescind the settlement agreement with Laura and redo that part of their deal. He also wanted payback from Laura of $2.7 million, half the amount of their earlier valuation of the Madoff account. Laura refused. Steven said the $5.4 million was a fiction, though they did not know it in 2006. So, Steven argued, Laura got a windfall. For her part, Laura argued that they were not mistaken at all in 2006, because the account did exist then. From Laura’s perspective, the losses arose only in late 2008 after Madoff confessed. By 2008, of course, Steven was the account’s sole owner. Though a superficially close case, Steven had the better of the argument.

            People entering bargains are generally held to them, but an exception applies if both parties were mistaken when they made their deal about a basic assumption that materially affects the exchange. In such situations, under the doctrine of “mutual mistake,” either side can void it, so long as the risk of the basic assumption was not taken by one party, but agreed to by both.

            A good example involved a coin deal. Beachcomber Coins paid $500 to another coin dealer, Boskett, for a rare dime supposedly minted in 1916 at Denver, signified by a “D” etched on the coin’s reverse (“tails”) side. Boskett had acquired the dime, along with two modest coins, for $450. He told a Beachcomber representative he would not sell it for less than $500. The representative studied the coin before buying it.

            Afterwards, another buyer offered Beachcomber $700 for it, subject to getting a genuineness certificate from the American Numismatic Society. The Society declared that the “D” on the coin’s reverse side was counterfeit. Beachcomber wanted to rescind its deal with Boskett, citing mutual mistake. Boskett refused, claiming that customary coin dealing practice called for dealers buying coins to do their own investigation and take all risks: caveat emptor, Latin for “let the buyer beware.”  The New Jersey Supreme Court held that the case fit the mutual mistake excuse to a tee, and, accordingly, rescinded the sale.

            Both sides assumed the coin was a genuine Denver-minted dime. This assumption was central to the pricing and both were mistaken about it. True, contracts can allocate risks of mistake to one side or the other. That happens when parties throw up their hands about whether some assumption is true or false. When people say things like “we’re not sure,” “we’re uncertain,” or “it’s a matter of judgment,” they are consciously allocating a known risk.

            In the coin case, however, both sides committed to a specific deal about mintage, neither indicating uncertainty about its authenticity and both assuming the coin was the real thing. Two factors reveal that both parties thought the coin was real: one, Boskett bought the coin for just less than $450, and two, Beachcomber’s rep examined it for some time and then forked over the hefty price. . . .

            The Madoff account is much like the dime. The parties in each case thought something was real—an account with securities in it, a dime minted in Denver. Both were mutually mistaken because of someone else’s fraud and traded something different from what they thought they were swapping. Enforcing either contract would let happenstance of fraud, rather than intention, determine what bargains are made and how gains are distributed.

            Neither case involves questions about what the dime or the account are really worth, how value fluctuates in markets, or how different people may assign different values. A mere change in the market value of exchanged property does not justify excuse for mutual mistake. Beachcomber couldn’t rescind its coin deal by saying the rare coin market had plummeted and Steven couldn’t rescind his agreement with Laura based solely on a decline in the stock market.

            Laura said there was no mistake when she and Steven signed their contract in 2006. They thought there was an account and there was, she said. Steven withdrew funds from it in 2006 and added funds before 2008. An account can exist although money deposited into it is not the same money that is paid when funds are withdrawn. Even after December 2008, the account “existed” in many senses. The account was the basis for Madoff customers to claim under a securities investor protection fund and it determined which customers had to return redemptions to the fund. . . .

            Steven countered that the case was a “textbook example of a mutual mistake.” If a real account existed, there would be no mutual mistake, Steven allowed, and value declines his risk to take. But no real account ever existed. It was irrelevant whether the fictional account had some value for some time. Though withdrawals could be made, the money would have been stolen from others. . . .

            By textbook example, Steven had in mind the landmark case that put mutual mistake firmly on the books. It involved the sale of a blooded, polled Angus cow named “Rose 2d of Aberlone.” Both parties, the seller Hiram Walker, who ran the liquor business that distributes Canadian Club Whiskey, and T.C. Sherwood, a prominent banker who became Michigan’s first banking commissioner, assumed the cow was barren and useless as breeding stock. The contract price was $80. Right before the cow was to be delivered, however, she produced a calf.

            Now valued as a breeder, Rose 2d of Aberlone was worth $750. The court held that the seller could rescind, as the mistaken belief that the calf was barren was the basic assumption of the deal, indicated by the pricing of the cow, showing that the two had a specific set of bovine attributes in mind that turned out to be incorrect. Mutual mistake applied because mistaken beliefs about a bargain would result in the incorrect distribution of benefits.

            The same was true in the case of Steven and Laura. Their bargain was to split economic value both parties thought to be $5.6 million. They were both innocently mistaken about that. In reality, there was nothing to split. There were no investments, securities, or returns or losses, and without those attributes the idea of an account is a nullity. Fraudulent institutional account statements are not a risk parties reasonably perceive or should prudently guard against in forming contracts. To hold parties to those terms after discovering the error is to hold them to a bargain they did not intend to make. . . .

            [The piece goes on to discuss a renowned case about violins, which Mr. Lattman referenced in his New York Times piece, where both parties vouched that they were buying and selling a Stradivarius that turned out to be a fake, illustrating mutual mistake as a basis to rescind a contract.].  

            Like the violin case or the cattle deal, Steven and Laura’s divorce settlement agreement was a model case of mutual mistake, resulting in rescission. Though ancient cases put caveat emptor in a rarified place, modern doctrines mediate it. Bargains today that amount to happenstance, rather than actual intentions of both parties, can be rescinded. When parties make a deal based on a shared central assumption that proves to be wrong—whether the parties are coin dealers, cattle traders, violin collectors, or divorcees—they are entitled to rescind it. The doctrine of mutual mistake protects the benefit of bargains people intended to make while freeing them from those they did not.


Beachcomber Coins, Inc. v. Boskett, 400 A.2d 78 (N.J. 1979).

Sherwood v. Walker, 33 N.W. 919 (Michigan 1887).

Smith v. Zimbalist, 38 P.2d 170 (Cal. App. 1934).

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10 Responses

  1. Chadd says:

    Informative analysis. Pity the exceedlingly lopsided comments at the Times link were so ignorant of this.

  2. Jon says:

    I am not sold. When the Simkins opened an account with Madoff, the account was assigned a name and number and the Simkins’ money was allocated by Madoff to that account. The first account statement issued by Madoff to the Simkins confirmed this deposit. The account existed.

    Madoff then stole money from the Simkin account to pay withdrawing investors. This may be a crime, but the account still existed. It existed from the moment the Simkins’ original deposit was confirmed as received and allocated to that name/number account.

    Steve Simkin makes a creative but fallacious argument that: “It was irrelevant whether the fictional account had some value for some time. Though withdrawals could be made, the money would have been stolen from others. . . .” In reality, money was stolen by Madoff from the SImkin account to pay withdrawing investors. The Simkin account existed from the very day it was created and funded.

  3. James Buckman says:

    Essential attributes of a valid investment account never existed. Funded with S&L’s real money, that money vanished into vapor, despite meticulous false facades fronting as attributes of a real account.

    Also interesting: the wife is an “heiress.” The NYT comments lined up against the man largely because people thought he was the richer of the two. Sounds like Laura is richer, thanks to family money, than Steve, who apparently has the long-hour life of big-law partner.

  4. David in nY says:

    Seems to me that this is not anything like the dime case. In cases like that, the most common of the “mutual mistake” cases, the loss ultimately falls on the seller in a buyer-seller situation, thus restoring the status quo ante. This is entirely just, because the seller is as a rule the person with the best information about the value of an asset, having held it longer and had more opportunity to learn of defects in it. If somebody is going to take the loss, it ought to be the seller.

    Here that principle in no way favors Simkin. The account was his, and he arranged a deal where he kept it. He did not have to do this, and there’s no basis, as in the coin case, for his shifting his loss to his ex-wife. He, as the contact with Madoff, should be presumed under the appropriate application of the “mutual mistake” theory, to be the one with the best access to information about any defects in the asset, and there’s no unfairness in leaving the loss with him. Indeed, there’s no substantive rationale (except his disappointment) for shifting the loss to her, as there is in a true mutual mistake case.

    Unless the “mutual mistake” doctrine is bounded by some rationale, it’s really just gibberish, a bunch of formalistic rules in search of a justification. But the proper justification does not favor Simkin here.

  5. Lawrence Cunningham says:

    David in nY:
    Where do you get the idea that Simkin owned the Madoff account? It was a joint account, just as with most of the couple’s assets.

    Why do you assume Simkin rather than Blank was in a better position to inspect the account statements and detect for fraud? The evidence does not support any such assertion.

    What makes you say “he arranged” a deal to keep the Madoff account? That arrangement was likewise joint.

    Take away all your assumptions and you are left with a fraudulent account that is much like the fraudulent dime, though not exactly, which no two cases ever are.


  6. David in nY says:

    How do you know it was a joint account, Mr. Cunningham? It appears that you assume it was “just as with most couple’s assets.” But the majority opinion plainly says, “The parties agreed that each would keep accounts titled in his or her name.” And it plainly says, “This account was titled in plaintiff’s name.” In addition, the dissent states “[a]t the time of the agreement, Steven had an account in his name with [Madoff].”

    Thus, it is clear that “Simkin owned the Madoff account.” Since that’s true, Simkin was plainly the favored one who was allowed by Madoff to invest with him.

    I say the loss is Simkin’s. The account was his, and he can’t shift the loss to an innocent party.

    And you might have done me the favor of reading the opinion before questioning my accuracy.

  7. Lawrence Cunningham says:

    David in nY: “And you might have done me the favor of reading the opinion before questioning my accuracy.” Please let’s not get testy! Of course I read the three judicial opinions in the case, along with the complaint, answer, and various briefs. I respect your opinion, both about how to determine ownership of marital assets under New York law, and what that means for the contract law of mutual mistake. I simply do not share your opinion on either point, for the reasons I’ve indicated. Thanks for the comments, which are useful and interesting to me.

  8. David in nY says:

    But I don’t understand, then. Your “points” seem to be that it wasn’t Simkin’s account (thought the opinion said it was) and that he didn’t “arrange” to keep that account, although according to the opinion, he plainly entered into an agreement which stated that all parties would keep the accounts which were titled in their own names. So I don’t get your positions at all.

    Is there something I’m missing?

  9. Lawrence Cunningham says:

    David in nY:

    My understanding:

    (1) the contract split the marital assets, which were the joint property of the couple, however titled or denominated (including Steven’s law practice);

    (2) the two agreed that these assets had an aggregate value of $13.2 million, which they agreed to split down the middle, with different forms of consideration changing hands, mostly cash to Laura (other than, for convenience, some assets already separately listed in her sole name), securities and other items to Steven (same caveat); and

    (3) in fact, they were mutually mistaken about the existence (validity, legitimacy, genuineness) of one line item on the asset list, erroneously entered at $5.4 million.

    In this view, Steven was not the sole owner of the fraudulent account or risk-bearer of its validity, but the two shared its ownership, divided its value, and were both innocently mistaken about what they were doing.

  10. Great post. I especially found it useful, thanks.